Composition Levy in GST – LawZ Magazine

By Altamush Zafar, CA at leading accountancy firm, PL Tandon & Co.

GST is round the corner and whole nation is waiting in great anticipation of what impacts it will have on their commercial setups. GST will dramatically change the way business is carried on by organisations of all sizes. In fact it is the small sized organisations which are more apprehensive about the implementation of GST and the procedural impacts it will have on their functions.

It is an obvious fact that small sized organisations and businesses in the un-organised sector do not have the resources to maintain proper books of accounts and other documents in a limited time frame nor do they have such expertise among their staff to understand new and complicated laws. Therefore the Governments always provide them with two major reliefs – Exemptions and Composition Levy. Here we will be talking about the Composition Levy in GST.

Composition Levy is an alternate method of levy of tax whereby there are less records to be maintained, less provisions to follow, less calculations to be done and easier to follow. For easy understanding we will divide our discussion into various topics.

Applicability

Composition Levy will only be applicable to persons having aggregate turnover in preceding financial year of Rs. 50 Lakhs or less. The limit of Rs. 50 Lakhs can be extended till Rs. 1 Crore by the Government through notifications. (Aggregate Turnover here means the total turnover of the person including exempt supplies made through the same PAN.)

In addition to the above condition the following persons are not eligible for composition levy:

Service Providers, except persons supplying goods being food or any article of human consumption or any drink (other than alcoholic liquor for human consumption) for consideration – in short, catering services and restaurants.
Those engaged in Non-Taxable Supply of Goods.
Those engaged in Inter-state supply of Goods.
Those engaged in supply of Goods through an e-commerce operator who is required to collect tax from the supplier.
Manufacturer of Notified Goods. (These goods will be notified in due course by the Government.)
A Casual Taxable Person. (A Casual Taxable Person means a person who occasionally supplies goods or services in the course or furtherance of business in a State or Union Territory where he does not have any fixed place of business.)
A Non-Resident Taxable Person. (A Non-Resident Taxable Person means a person who occasionally supplies goods or services but does not have a fixed place of business or residence in India.)
A person who holds stock on the appointed day, i.e. the day when GST comes into effect, which was purchased in the course of inter-state trade, or import, or were mere transfers from branches or agents from outside the State.

The supplier will furnish the details of stock held by him preceding the date from which he opts to pay tax under composition levy, including inward supply of goods received from an unregistered person in Form GST CMP-03 within 60 days from the date option for composition levy is exercised.

Conditions to be fulfilled

Where the taxable person is eligible for the composition levy the following conditions are to be fulfilled if he is to continue with the composition provisions:

Fulfilling the applicability parameters mentioned above including the Aggregate Turnover Limit.
Where a person has registered itself under the composition levy then other premises with the same PAN will also register itself under the composition levy. Regular registration is not available.
The supplier under the composition levy can neither collect tax from customers nor take any credits of GST paid on inputs or outputs (reverse charge).
Reverse Charge mechanism will be fully applicable on the suppliers under composition levy.
In place of a tax invoice the person shall issue a bill of supply. (A bill of supply has comparatively lesser parameters to fill than tax invoice.)
The person has to mention the words “COMPOSITION TAXABLE PERSON, NOT ELIGIBLE TO COLLECT TAX ON SUPPLIES” at the top of Bill of Supply issued by him.
The person has to mention “COMPOSITION TAXABLE PERSON” on every notice or signboard at every place of business.

Rate of Tax under Composition Levy

The CGST Act gives the following rates of tax: 1% of Turnover in State or Union Territory for Manufacturers; 2.5% of turnover in State or Union Territory in case of supplies in the nature of catering services and restaurants. This is the only service under the composition levy as already mentioned earlier; 0.5% for other suppliers not mentioned in the above two points.

Note that these rates are given in the CGST Act therefore the total levy will get doubled by virtue of SGST Act of respective states making the rates 2%, 5% and 1% respectively.

Transitional Provisions (Transition from Pre GST Era to Post GST Era)

Any person who has completed Data Migration would have been allotted a Provisional Registration Number. The person with the provisional registration number desirous to be taxable under the composition levy would have to file intimation in Form GST CMP-01 either prior to the appointed day or within 30 days of that day.

Where the form is filed after the appointed day the supplier would not collect tax and will issue bill of supply from the very beginning, that is the appointed day.

Where there are CENVAT and State VAT credits standing in his books the supplier cannot carry them forward nor can he avail credits which were left out in the old tax regime.

If we take all the last dates then the following will be the time line:

30 Days: 31st July (assuming 1st July as the Appointed Day) – Option Exercised.
60 Days: 29th September.

Composition Levy will be effective from the Appointed Day.

Transition Provisions (From Regular Levy to Composition Levy)

To apply for the option of composition levy the supplier would have to file intimation in Form GST CMP-02 before the commencement of the financial year for which the option is to be exercised.

In addition to the above the supplier will also file a statement in Form GST ITC-03 within 60 days from the commencement of the relevant Financial Year which will contain the details of stock, semi-finished and finished goods held as well as capital goods and the credits attributable to them.

The lawmakers do not have the intention to provide any benefit of credits to suppliers under composition levy. Those suppliers who switch from regular levy to composition levy will have to pay an amount equivalent to the credits attributable to stock held, inputs in semi-finished and finished goods and credits attributable to capital goods for its remaining life.

Composition Levy will be effective from the commencement of the financial year.

Transition Provisions (First Time Registration)

Where any taxable person is getting registered for the first time he can give an application to pay tax under composition levy in Form GST REG-01 and the same will be considered as intimation.

Where goods held in stock on the day prior to the day for which the option is being exercised were purchased from unregistered person, the composition scheme supplier will have to pay GST on reverse charge in respect of such goods.

Composition Levy will be effective from:

If application was made within 30 days of liability to get registered – the date on which he became liable to get registered.
Else, date of grant of registration by the proper officer.

Cessation of Composition Levy

Cessation of Composition Levy will occur due to the following:

Voluntary Withdrawal.
When any of the conditions cease to be fulfilled.
By order of Proper Officer.

Where a supplier ceases to be liable under composition levy he will be eligible for credits on stock held, on inputs contained in semi-finished and finished goods held and credits on capital goods for the remaining life of capital goods.

Benefits of Composition Levy

The following are the major benefits:

Instead of monthly returns, a taxable supplier under composition levy will file Quarterly Returns for Outward Supplies, Inward Supplies, and Tax Payable. Tax will be paid within 18 days after the end of Quarter. (Quarters are fixed – June, September, December and March.)
Bill of Supply contains much less information than a normal Tax Invoice.

It may seem that the rate of tax is quite low at 2%, 5% and 1% compared to standard rates of 12% and 18% under regular levy. However it can be a matter of either gain or loss.

Consider the case of manufacturer having composition levy at 2% and assume that the inputs required to manufacture the product and the finished product itself are taxable at the rate of 12% under regular levy. If the inputs including processing costs which are liable to GST are more than 80% of the total costs then regular levy is more profitable than composition levy even when rate of tax is higher in regular levy.

This is due to the fact that input tax becomes a part of cost in composition levy as credits are not available. Higher the amount of inputs and input services more will be the input tax and more will be the cost. The percentage gets increased to 87% (approx.) when compared to uniform 18% tax rate.

Other Provisions

Where the taxable person under the composition levy does not furnish returns for 3 consecutive quarters the proper officer has the power to cancel the registration of the person.

Thus we see that the benefits of the composition levy are only to the extent of procedural matters. The benefit of rates may not be very substantial and in many cases it might not be a benefit at all.

Composition Levy should be chosen only when the taxable person cannot afford to keep elaborate records. This scheme is only suited to small enterprises as it restricts both the turnover and the geographical scale of operations (inter-state suppliers not eligible for composition levy). Therefore this scheme should be chosen after taking into account all aspects even by small enterprises.